The Moral Hazard of Inefficiency in Class Action Administration

With the recent wave of national and international class actions it is important to ensure you and your clients get the best service at the best cost through efficient processes. It is no new concept that efficiency can improve work flow, enhance quality, and reduce costs. This is especially true in class action administration. However, what happens when due diligence in selecting a class action administrator is not performed for every class action and the same firm is selected again and again due to legacy issues? Although it is true that we are all more comfortable working with people, teams, and companies we know and have worked with before, it may also be true that we continue to work with them even if we have not always been 100% satisfied with their service. Without a periodic assessment of your class action administrator and the capability of its competitors, the class action administrator runs the risk of lethargy regarding the improvement of process efficiency potentially costing your firm and your clients millions of dollars. This is the moral hazard of inefficiency in class action administration.

Causes of Moral Hazard

Moral hazard in class action administration occurs when the administrator behaves differently due to its lack of exposure to the failure risks inherent in project procurement. This type of moral hazard can occur when the administrator is always the number one contender based on legacy, length of time in business, or personal connections; complacency or lethargy because of past relationships; or when the administrator's primary business is in some other area, such as accounting or third party claims. We are not saying that because your administrator meets one of these criteria that you should replace them. We are simply suggesting that you ensure your clients are continuing to receive the best service and the best value. Without competition, a strong moral hazard of neglecting to incorporate the most efficient processes exists.

Causes of Inefficiency

Though there could be many reasons the most efficient processes are not incorporated into an administrators work flow, the two most likely are the negative cost-benefit ratio and the integration challenges, especially in larger firms. When an administrator weighs the additional financial costs to develop and implement more efficient technologies into their work flow against the added financial benefits, the added benefits will never be greater than the costs, for the administrator, unless external considerations are also taken into account. By this, we mean, if the administrator is forced to become more efficient or lose business due to improved technology, e.g. a transition to web-based claim forms. The second most likely reason is the need for a unique set of skills required for the technological or work flow experts to integrate the system(s) to create new efficiencies. Without these uniquely skilled (and costly) experts on staff, opportunities for integration can easily be overseen or underutilized. When integration of the most efficient processes is attempted, the actual integration, especially with larger administrators, could be slow and happen far less frequently than in smaller, more agile, firms.

Cost of Inefficiency

You may be saying; "So what if this long time business partnership is less efficient. The plaintiffs are about as happy as they always seem to be, and we haven't had any terrible blunders that couldn't be fixed. Why take the risk and use the time of vetting out a new firm? How much could the benefits actually save?" The cost of moral hazard when measured in revenue of the administrator can be substantial. I have witnessed overcharges in administration costs by as much as 25% through extremely inefficient processes (i.e. $7.5 Million Dollars of potential savings on one project). I'd like to believe this was more of an exception than the rule; however, one would venture to guess that most class action administrators could reduce the cost to their clients by at least 5-10%, (i.e., $1.5-$3 Million Dollars of potential savings on a $30 million dollar administration project) by increasing efficiencies and without lowering their bill rates. With available technologies, advances in automation can reduce the cost of certain administration processes by as much as 85% while actually increasing the integrity, accuracy, and completeness of the information collected. With these potential cost savings in mind, one should ask their administrator to seek out additional efficiencies.

Implementation of Efficiency

In our environment of exponential technological growth, the administrator will have many opportunities to improve work flow, enhance quality, and reduce costs. The obvious first step is to look for opportunities to replace personnel with technology, such as file reviewers. Once data is entered into the database, the system can easily review the data for missing information, incorrect information, and discrepancies in dates, values, and duplications far more quickly than and at least as accurately as the personnel. The next opportunity lies in replacing mundane, repetitive tasks with automation technology, such as file label printing and settlement calculations. Finally, look for opportunities to improve work flow and reduce costs by allowing the claimant to perform the data entry and verify the accuracy, and completeness of the claim form and its attachments him/herself. In seeking greater efficiency one should take precautions and perform a complete analysis of how any new implementation will affect the overall process.

Implementation Caution

It is important to keep in mind several key points when seeking greater efficiency. The first and most important is not to compromise the breadth or ability for class members to be notified, file claims, or receive a disbursement. Any decrease in these services to class members could result in added time, costs, and possible litigation. The next most important point is that an increase of efficiency should not compromise the integrity of the data without new quality assurance and quality control procedures required to compensate for any increased risk. The final point is that efficiency should always be accompanied by increased or consistent quality. Efficiency for efficiency's sake, without an eye towards maintaining or increasing quality, will only compromise your administrator's work.

Conclusion

Though inefficiency creates the question of moral hazard for class action administrators, the pursuit of efficiency is worth the benefits of improved work flow, enhanced quality, and reduced costs. You now have the tools necessary to perform your own due diligence to improve the efficiencies of your class action administrator or to find a new administrator who will save you and your clients' valuable resources.